PEG Ratio Insights: Tech Stocks Reach Highest Valuation Against the S&P 500 Since the Dot-Com Bubble

Despite a decline in 12-month forward EPS, the tech sector is currently experiencing its highest relative valuation against the S&P 500 since the dot-com bubble.

The tech sector is currently witnessing its highest valuation since the Financial Crisis, surpassing the S&P 500 by a multiple of 1.4. The only time it was more expensive was during the infamous dot-com bubble.

The Dot-Com bubble crash was primarily caused by excessive valuations, evident through the PEG ratio which measures the price investors are willing to pay for a company's earnings growth. The PEG ratio is computed by dividing the price-to-earnings (P/E) ratio of a company by its projected earnings per share (EPS) growth rate over a given time frame.

The chart below shows the 2000 Dot-Com bubble timeline.
From 1995 to 1997, the technology sector experienced a period of significant earnings growth.

From 1997 to 1999, investor euphoria escalated, leading to an increase in valuations as investors were willing to pay higher for the same level of earnings growth.

In 2000, the unsustainable and excessively high valuations, characterized by extremely elevated PEG ratios, led to the bursting of the Technology bubble.

The similarity between today's PEG ratio levels and those witnessed during the Dot-Com crash suggests that the current rally may have a limited lifespan, a market idea from an influencer GameOfTrades (@GameOfTrades) who 250,000 YouTube subscribers follow.